Sheikh’s Debt Deal for Exxon LNG Stake May Prompt Offers

Billionaire Sheikh Mansour bin Zayed Al Nahyan, owner of Manchester City soccer club, looks on during the English Premier League football match against Liverpool at The City of Manchester stadium, Manchester on Aug. 23, 2010. Photographer: Andrew Yates/AFP/Getty Images

Nov. 8 (Bloomberg) -- A convertible debt deal struck during
the 2008 financial crisis led by billionaire Sheikh Mansour bin
Zayed Al Nahyan of Abu Dhabi is set to trigger a contest for a
slice of a $19 billion natural gas project.

The export terminal being built by Exxon Mobil Corp. is in
Papua New Guinea, one of the world’s poorest nations, which now
wants to buy back the debt before it becomes equity for Abu
Dhabi. The project is forecast to double the local economy with
global LNG demand estimated to rise twofold by 2025.

Sheikh Mansour, a member of Abu Dhabi’s ruling family and
owner of Manchester City soccer club, is due to oversee a swap
of that debt for a 14.7 percent stake in Oil Search Ltd., owner
of almost a third of the project. The March conversion date is
sparking speculation that producers including Exxon, the world’s
biggest energy company, may also seek the holding.

“There could be competition for this stake,” said Johan
Hedstrom, senior oil and gas analyst at Canaccord Genuity Group
Inc. in Sydney. “There are a number of big companies genuinely
interested in getting into Papua New Guinea.”

The coming swap has spurred talks between Abu Dhabi, home
to the first gold-bar vending machine, and Papua New Guinea, the
Pacific nation near Australia whose gross domestic product is
less than 5 percent of Exxon’s $410 billion market value.

Exxon and Total SA are among potential acquirers for Oil
Search, Sanford C. Bernstein & Co. said earlier this year. Total
declined in an e-mail to comment. Alan Jeffers, an Exxon
spokesman in Irving, Texas, said in an e-mail it was the
company’s policy not to comment on potential business decisions.

Sovereign Fund

The sheikh is chairman of Abu Dhabi-owned International
Petroleum Investment Co., which completed the purchase of the
A$1.68 billion ($1.6 billion) of exchangeable bonds in 2009. The
emirate has the third-largest sovereign fund with $627 billion
in assets, the Sovereign Wealth Fund Institute said.

The PNG government already has a 17 percent interest in the
project. It wants to hold on to the stock in the company, and
IPIC also recognizes Oil Search’s potential, Peter Botten,
managing director of the Port Moresby-based company, said in a
phone interview. “There’s a commercial dynamic and also a
government-to-government dynamic, and on that basis it has a few
more dimensions than a straight commercial deal.”

Voice mail messages left at IPIC’s offices in Abu Dhabi
weren’t returned. Calls to government offices in Papua New
Guinea weren’t answered.

Barclays Swap

The sheikh is experienced in converting debt and equity. He
used convertible stock in 2008 to become at the time the biggest
holder in Barclays Plc, and swapped almost $500 million of loans
for equity in Manchester City in 2010, two years before the
soccer club won its first premiership in 44 years.

Citigroup Inc., UBS AG and Barclays are among banks seeking
to provide more than A$1.5 billion in financing to help Papua
New Guinea maintain its holding in Oil Search, people with
knowledge of the matter said last month. The LNG development is
forecast to generate more than $30 billion in cash for the
nation over three decades, according to a 2008 report by
consultants Acil Allen Consulting.

Total, Europe’s third-biggest oil company, reached a deal
last year with Oil Search, which owns a 29 percent stake in the
Exxon project, to explore for gas in PNG, while Royal Dutch
Shell Plc said in 2011 it would look at opportunities in the
country. InterOil Corp. started talks this year with Exxon to
jointly develop gas fields in the Pacific nation.

“It would potentially put 15 percent of the stock in
play” if IPIC gets the shares, said Andrew Williams, Melbourne-based oil and gas analyst for RBC Capital Markets. “It’s what
makes the scenario interesting for Oil Search.”

Global Demand

The Asia-Pacific region will account for 29 percent of
total worldwide gas demand in 2040, according to Exxon. PNG’s
gross domestic product is forecast to almost double to $24
billion from 2011 to 2015, according to the International
Monetary Fund. It will gain 21 percent in 2015, the second-fastest growth in the world, according to the data.

“IPIC I’d think would be very interested in maintaining a
position in PNG one way or another as an investor because it is
looking increasingly attractive as a gas play,” said Tony
Regan, a Singapore-based consultant at Tri-Zen International
Inc. Oil Search appeals to investors because of the potential to
expand the LNG project and develop a second one, he said.

Talks between Papua New Guinea and Abu Dhabi indicate that
IPIC is at least interested in a deal, said Mark Samter, a
Sydney-based oil and gas analyst at Credit Suisse Group AG.
Papua New Guinea may offer Abu Dhabi LNG from its share of
supplies from future production units as part of a deal to
retain the Oil Search holding, according to the bank.

Long-Term

Still, IPIC is unlikely to sell the stake, according to a
Bank of America Merrill Lynch report last month.

IPIC is “typically a very long-term investor, buy and
hold, and likes large minority stakes,” Robin Mills, head of
consulting at Manaar Energy Consulting & Project Management in
Dubai, said in a phone interview.

IPIC’s ownership of the stake could see a speculative
premium develop in Oil Search’s share price with a potential
acquirer targeting the holding as a cornerstone ahead of a bid,
JPMorgan Chase & Co. said in a Sept. 30 report.

“As we progress to deliver PNG LNG and then various high-returning expansion opportunities there’s no doubt there’s going
to be a group of people that will be interested in Oil Search
and I’m sure that will continue,” Botten said.